Special Report: Short-term Forecast of Global Inflation

In April 2011, the IMF raised its 2011 forecast for global inflation to 4.5% (from 3.7% in 2010), mainly due to a surge in global commodity prices. While high unemployment will continue holding back inflationary pressures in most advanced economies, inflation is accelerating in many emerging and developing economies as a result of accommodative macroeconomic policies and increasing capacity constraints.

Overall Outlook

In 2011, inflation will remain subdued in advanced economies due to weak domestic consumption as a result of high unemployment and below-potential economic recovery. However, the IMF has raised its 2011 average inflation forecast for advanced economies to 2.2% instead of 1.6% projected in January 2011, given the rise in global food and energy prices. In 2012, average inflation in advanced economies is expected to slow to 1.7% as commodity price hikes should abate and wages accelerate gradually.

The IMF has also raised its average inflation forecasts for emerging and developing economies to 6.9% for 2011 and 5.3% for 2012, from 6.0% and 4.8% estimated in January 2011. Rising food and energy prices have driven up inflation significantly in many developing countries due to their high weight in the consumer price index in these economies. Meanwhile, inflationary pressures have intensified in several emerging economies, including China and Brazil, as a result of rapid credit expansion and rising capital inflows.

In 2012, the average global inflation is expected to ease to 3.4% as a result of money tightening policies and a stabilisation of commodity prices.

Africa and the Middle East

  • Egypt is forecast to have the highest annual inflation rates in the Africa and Middle East region in 2011 and 2012, at 11.5% and 12.0% respectively. Rising food prices have led to a rapid rise in consumer prices in Egypt since 2010, causing social and political unrest and affecting the country’s economic growth. Due to a cut in fuel subsidies and the government’s expansionary fiscal policy before the 2011 election, Nigeria’s annual inflation rate is also expected to remain high at 11.1% in 2011 before it slows to 9.5% in 2012;
  • Surging global commodity prices, especially food prices, have also increased inflationary pressures in countries in the Gulf Cooperation Council (GCC). As a result, inflation forecasts for Qatar and Kuwait have been raised to 4.2% and 6.1% for 2011 respectively, instead of 3.0% and 3.6% estimated in October 2010. Inflation in Saudi Arabia, the region’s largest economy, will also remain above 5.0% in the short term;
  • Israel is estimated to have the lowest annual inflation rates in the region in 2011 and 2012, at 3.0% and 2.5% respectively. Due to growing inflation pressures, however, the Bank of Israel has raised its basic interest rate several times since late 2009.

Asia Pacific and Australasia

  • Inflation in most Asian Pacific and Australasian countries should accelerate in the short term as a result of rising commodity prices and rapid credit expansion. At 15.5% in 2011 and 14.0% in 2012, Pakistan is forecast to lead the region in terms of inflation in the coming years. Soaring inflation caused by higher food and fuel prices and a growing budget deficit has created challenges for Pakistan’s struggling economy and affected consumers’ income and expenditure;
  • Countries in the region which will also see double-digit inflation in 2011 include Vietnam and Azerbaijan, with an annual inflation rate being forecast at 13.5% and 10.3% respectively. While this primarily reflects the rising international commodity and food prices in both countries, the surge in inflation in Vietnam has also been driven by a rapid expansion of bank credit since 2010;
  • With an annual inflation rate of 0.2% being forecast for both 2011 and 2012 – the lowest rates in the region, Japan is expected to escape from deflation in 2011, although inflation expectations remain subdued. Japan’s devastating disasters in March 2011 have caused some energy shortages while reconstruction efforts should also drive prices slightly up;
  • Inflation forecasts for China and India have been raised to 5.0% and 7.5% for 2011 respectively, instead of 2.7% and 6.7% estimated in October 2010. While higher food and commodity prices have been a major driver of higher inflation in the two countries, the acceleration of inflation in China also reflects a rapid credit expansion and soaring property prices. In order to curb inflation and avoid the risk of overheating, the Indian and Chinese governments have since 2010 tightened their monetary policies by raising interest rates and capital reserve ratios for banks.

Eastern Europe

  • Belarus is expected to experience the highest annual inflation in Eastern Europe in the coming years, at 12.9% in 2011 and 9.7% in 2012. Higher fuel prices have led to a rise in consumer prices in Belarus since early 2011. In addition, there should be a boom in the prices of imported goods in the short term since the government plans to devalue its national currency in an effort to ease the country’s current account deficit;
  • The IMF has raised upwards its inflation forecast for Russia to 9.3% for 2011 from a 7.4% estimation made in October 2010. The region’s largest economy has faced stronger inflationary pressures as food prices have sky-rocketed since late 2010 after a severe drought in summer 2010 destroyed most of the harvest. For 2012, the annual inflation rate is expected to ease to 8.0% owing to anti-inflation measures;
  • The Czech Republic will have the lowest annual inflation rate in Eastern Europe in 2011, being forecast at 2.0%. Despite a pick-up in investment and export demand, domestic consumption remains weak in the country, leaving short-term inflationary pressures subdued.

  The Americas

  • Due to higher food and energy prices, the 2011 inflation forecast for the USA has been revised upwards by the IMF to 2.2%, compared to 1.0% estimated in October 2010. The USA, however, will continue having the lowest levels of inflation in the Americas in 2011 and 2012 given weak domestic demand caused by the country’s sluggish economic recovery;
  • At 29.8% in 2011 and 31.3% in 2012, the annual inflation rates in Venezuela should continue being the highest in the region and in the world. The country’s economic situation remains unstable while rising global food prices have resulted in a spike in the country’s food import bills. The government’s announcement of a 25.0% increase in minimum wage in April 2011 should further boost inflationary pressures in the short term;
  • The IMF has raised its inflation forecast for Brazil to 6.3% in 2011 instead of 4.6% made in October 2010. Strong capital inflows and rapid credit expansion have driven inflationary pressures upwards since late 2010, showing some signs of overheating risks in the Brazilian economy.

Western Europe

  • Inflation in most Western Europe countries will remain subdued as a result of a below-potential recovery of the region’s economy. Turkey is expected to see the highest annual inflation rates in the region in 2011 and 2012, at 5.7% and 6.0% respectively. In order to slow down credit growth and curb inflation, the central bank of Turkey has raised reserve requirement ratios five times since November 2010;
  • After two years of deflation, Ireland is expected to see a modest inflation rate of 0.5% in both 2011 and 2012, the lowest rate in the region. While the economy will return to growth in 2011, consumer confidence remains persistently low due to a high rate of unemployment;
  • The annual inflation rate in Germany – the region’s largest economy – is expected to quicken to 2.2% in 2011 (up from a 1.4% forecast made in October 2010) before it slows to 1.5% in 2012. Falling unemployment, low interest rates and a stronger-than-expected economic recovery have fuelled domestic consumption in Germany since late 2010, pushing inflationary pressures upwards;
  • The 2011 inflation forecast for the United Kingdom (UK) has also been revised significantly upwards to 4.3%, compared to 2.5% estimated in October 2010. Inflation in the UK has been on the rise since early 2011 as a result of higher food and fuel prices as well as an increase in the country’s standard VAT rate from 17.5% to 20.0% in January 2011.